IRS TAX PROBLEMS – Tax Benefits for Higher Education
Higher education costs paid in 2016 can mean tax savings when taxpayers file their tax returns. If taxpayers, their spouses or their dependents took post-high school coursework last year, they may be eligible for a tax credit or deduction.
Here are some facts from the IRS about tax benefits for higher education.
For 2016, there are two tax credits available to help taxpayers offset the costs of higher education. The American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC) may reduce the amount of income tax owed. Use IRS Form 8863 to claim the education credits.
The American Opportunity Credit (AOC) is:
- Worth a maximum benefit up to $2,500 per eligible student.
- Only for the first four years at an eligible college or vocational school.
- For students pursuing a degree or other recognized education credential.
- For students enrolled at least half time for at least one academic period during 2016. Taxpayers can claim the AOC for a student enrolled in the first three months of 2017 as long as they paid qualified expenses in 2016.
- Partially refundable. If the credit brings the amount of tax owed to zero, 40 percent (40%) of any remaining amount of the credit (up to $1,000) will be refunded.
The Lifetime Learning Credit (LLC) is:
- Worth a maximum benefit up to $2,000 per tax return, per year, no matter how many students qualify.
- Available for all years of postsecondary education and for courses to acquire or improve job skills.
- Available for an unlimited number of tax years
The tuition and fees deduction can reduce the amount of income subject to tax. This deduction may be beneficial for taxpayers who don’t qualify for the American Opportunity Credit or the Lifetime Learning Credit. Use IRS Form 8917 to claim the tuition and fees deduction.
The Tuition and Fees Deduction is:
- Worth a maximum benefit up to $4,000,
- Claimed as an adjustment to income,
- Available even if a taxpayer doesn’t itemize deductions on Schedule A,
- Limited to tuition and certain related expenses required for enrollment or attendance at eligible postsecondary educational institutions.
- Beginning in 2016, to be eligible for an education benefit, a student is required to have Form 1098-T, Tuition Statement. They receive this form from the school they attended. There are exceptions for some students. See IRS Publication 970 for more details.
- They may only claim qualifying expenses paid in 2016.
- They can’t claim either credit if someone else claims them as a dependent.
- They can’t claim either AOTC or LLC and the Tuition and Fees Deduction for the same student or for the same expense in the same year.
- Income limits could reduce the amount of credits or deductions they can claim.
- The IRS Interactive Tax Assistant Tool on IRS.gov can help check eligibility.
IRS TAX PROBLEMS – Deducting a Charitable Donation
If taxpayers gave money or goods to a charity in 2016, they may be able to claim a deduction on their federal tax return. Taxpayers can use the IRS Interactive Tax Assistant tool, “Can I Deduct My Charitable Contribution?”, to help determine if their charitable contributions are deductible.
Here are some important facts about charitable donations:
- Qualified Charities. Taxpayers must donate to a qualified charity. Gifts to individuals, political organizations or candidates are not deductible.
- Itemize Deductions. To deduct charitable contributions, taxpayers must file Form 1040 and itemize deductions. File Schedule “A”, Itemized Deductions, with a federal tax return.
- Benefit in Return. If taxpayers get something in return for their donation, they may have to reduce their deduction. Taxpayers can only deduct the amount that exceeds the fair market value of the benefit received. Examples of benefits include merchandise, meals, tickets to events or other goods and services.
- Type of Donation. If taxpayers give property instead of cash, their deduction amount is normally limited to the item’s fair market value. Fair market value is generally the price they would get if the property sold on the open market. If they donate used clothing and household items, those items generally must be in good condition or better. Special rules apply to cars, boats and other types of property donations.
- Noncash Charitable Contributions. File IRS Form 8283, Noncash Charitable Contributions, for all noncash gifts totaling more than $500 for the year. Complete section-A for noncash property contributions worth $5,000 or less. Complete section-B for noncash property contributions more than $5,000 and include a qualified appraisal to the return. The type of records they must keep depends on the amount and type of their donation. To learn more about what records to keep, see IRS Publication 526, Charitable Contributions.
- Donations of $250 or More. If taxpayers donated cash or goods of $250 or more, they must have a written statement from the charity. It must show the amount of the donation and a description of any property given. It must also say whether they received any goods or services in exchange for the gift.
IRS TAX PROBLEMS – Individual Retirement Accounts (“IRA’s) for 2016
Taxpayers often have questions about Individual Retirement Arrangements, or “IRAs”. Common questions include: When can a person contribute, how does an IRA impact taxes, and what are other common rules.
- Age Rules. Taxpayers must be under age 70½ at the end of the tax year to contribute to a traditional IRA. There is no age limit to contribute to a Roth IRA.
- Compensation Rules. A taxpayer must have taxable compensation to contribute to an IRA. This includes income from wages and salaries and net self-employment income. It also includes tips, commissions, bonuses and alimony. If a taxpayer is married and files a joint tax return, only one spouse needs to have compensation in most cases.
- When to Contribute. Taxpayers may contribute to an IRA at any time during the year. To count for 2016, a person must contribute by the due date of their tax return. This does not include extensions. This means most people must contribute by April 18, 2017. Taxpayers who contribute between Jan. 1 and April 18 need to advise the plan sponsor of year they wish to apply the contribution (2016 or 2017).
- Contribution Limits. Generally, the most a taxpayer can contribute to their IRA for 2016 is the smaller of either their taxable compensation for the year or $5,500. If the taxpayer is 50 or older at the end of 2016, the maximum amount they may contribute increases to $6,500. If a person contributes more than these limits, an additional tax will apply. The additional tax is six percent of the excess amount contributed that is in their account at the end of the year.
- Taxability Rules. Normally taxpayers don’t pay income tax on funds in a traditional IRA until they start taking distributions from it. Qualified distributions from a Roth IRA are tax-free.
- Deductibility Rules. Taxpayers may be able to deduct some or all of their contributions to their traditional IRA. See IRS Publication 590-A.
- Saver’s Credit. A taxpayer who contributes to an IRA may also qualify for the Saver’s Credit. It can reduce a person’s taxes up to $2,000 if they file a joint return. Use IRS Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the credit. A taxpayer may file either Form 1040A or 1040 to claim the Saver’s Credit.
- Rollovers of Retirement Plan and IRA Distributions. When taxpayers Roll-Over a retirement plan distribution, they generally don’t pay tax on it until they withdraw it from the new plan. If they don’t roll over their distribution, it will be taxable (other than qualified Roth distributions and any amounts already taxed). The payment may also be subject to additional tax unless the taxpayer is eligible for one of the exceptions to the 10% additional tax on early distributions.
- myRA. If a taxpayer’s employer does not offer a retirement plan, they may want to consider a “myRA”. This is a retirement savings plan offered by the U.S. Department of the Treasury. Taxpayer’s may also direct deposit their entire refund or a portion of it into an existing myRA.
Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity.
REMINDER – Pennsylvania 2017 Tax Amnesty Program Starting Soon
Any business or individual that owes taxes to Pennsylvania as of Dec. 31, 2015, is eligible for Pennsylvania’s upcoming 2017 Amnesty Program (April 21, 2017 to June 19, 2017). In general, all taxes owed to the Pennsylvania Department of Revenue are eligible for the amnesty, including common business taxes such as corporate income tax, employer withholding tax, gross receipts tax, and sales and use tax.
One of the few taxes not eligible for the program is unemployment compensation because it is administered separately by the Department of Labor and Industry.
Companies and individuals that participate will pay a reduced amount on their delinquent taxes because all penalties will be waived and they will only have to pay 50% of the interest they owe. They will, however, have to pay the reduced amount in full by June 19, 2017, with no extensions available.
Importantly, taxpayers that owe Pennsylvania back taxes and don’t participate in the program will owe more than before. Any companies eligible for the amnesty program that choose not to participate will receive a “5 percent (5%) non-participation penalty” on the total balance due and may face additional legal action.
Participation in the Pennsylvania 2017 Amnesty Program is one-time only. Anyone that participated in the 2010 Pennsylvania Amnesty Program is not eligible in 2017, and likewise, 2017 participants will not be eligible for future Pennsylvania tax amnesty.
As stated above, there will only be a short window to file the amnesty returns, from April 21 — June 19, 2017. Check the Pennsylvania Department of Revenue website for additional information and materials.
IRS TAX PROBLEMS – What is the Additional Medicare Tax?
Some taxpayers may be required to pay an Additional Medicare Tax if their income is over a certain limit. The IRS would like people to know more about this tax.
- Tax Rate. The Additional Medicare Tax rate is 0.9 percent.
- Income Subject to Tax. The tax applies to the amount of wages, self-employment income and railroad retirement (RRTA) compensation that is more than a threshold amount.
- Threshold Amount. Filing status determines the threshold amount. For those who are married and file a joint return, they must combine the wages, compensation or self-employment income of their spouse with their own. The combined total income determines if it is over the threshold for this tax. The threshold amounts are
|Married filing jointly
|Married filing separately
|Head of household
|Qualifying widow(er) with dependent child
- Withholding / Estimated Tax. Employers must withhold this tax from wages or compensation when they pay employees more than $200,000 in a calendar year. Self-employed taxpayers should include it for estimated tax liability purposes.
- Underpayment of Estimated Tax. People who had too little tax withheld or did not pay enough estimated tax may owe an estimated tax penalty. IRS Publication 505, Tax Withholding and Estimated Tax, provides rules and details on estimated taxes.
People who owe this tax should file IRS Form 8959, with their tax return. People should also report any Additional Medicare Tax withheld by their employer or employers on Form 8959. IRS.gov offers more on this topic. Forms and publications are available on IRS.gov/forms anytime.
IRS TAX PROBLEMS – Medical and Dental Expenses May Impact Your Taxes
Medical expenses can trim taxes. Keeping good records and knowing what to deduct make all the difference. Here is some basic information to help taxpayers know what qualifies as medical and dental expenses:
- Itemize. Taxpayers can only claim medical expenses that they paid for in 2016 if they itemize deductions on a federal tax return.
- Qualifying Expenses. Taxpayers can include most medical and dental costs that they paid for themselves, their spouses and their dependents including:
- The costs of diagnosing, treating, easing or preventing disease.
- The costs paid for prescription drugs and insulin.
- The costs paid for insurance premiums for policies that cover medical care.
- Some long-term care insurance costs.
Exceptions and special rules apply. Costs reimbursed by insurance or other sources normally do not qualify for a deduction. More examples of what costs taxpayers can and can’t deduct are in IRS Publication 502, “Medical and Dental Expenses”.
- Travel Costs Count. It is possible to deduct travel costs paid for medical care. This includes costs such as public transportation, ambulance service, tolls and parking fees. For use of a car, deduct either the actual costs or the standard mileage rate for medical travel. The rate is 19 cents per mile for 2016.
- No Double Benefit. Don’t claim a tax deduction for medical expenses paid with funds from your Health Savings Account (HSA) or Flexible Spending Arrangements (FSA). Amounts paid with funds from these plans are usually tax-free.
- Use the Tool. Taxpayers can use the Interactive Tax Assistant tool on IRS.gov to see if they can deduct their medical expenses.
IRS TAX PROBLEMS – Debt Cancellation May be Taxable
If a lender cancels part or all of a debt, a taxpayer must generally consider this as income. However, the law allows an exclusion that may apply to homeowners who had their mortgage debt canceled in 2016.
Here is basic information about debt cancellation:
- Main Home. If the canceled debt was a loan on a taxpayer’s main home, they may be able to exclude the canceled amount from their income. They must have used the loan to buy, build or substantially improve their main home to qualify. Their main home must also secure the mortgage.
- Loan Modification. If a taxpayer’s lender canceled or reduced part of their mortgage balance through a loan modification or ‘workout,’ the taxpayer may be able to exclude that amount from their income. They may also be able to exclude debt discharged as part of the Home Affordable Modification Program, or “HAMP”. The exclusion may also apply to the amount of debt canceled in a foreclosure.
- Refinanced Mortgage. The exclusion may apply to amounts canceled on a refinanced mortgage. This applies only if the taxpayer used proceeds from the refinancing to buy, build or substantially improve their main home and only up to the amount of the old mortgage principal just before refinancing. Amounts used for other purposes do not qualify.
- Other Canceled Debt. Other types of canceled debt such as second homes, rental and business property, credit card debt or car loans do not qualify for this special exclusion. On the other hand, there are other rules that may allow those types of canceled debts to be nontaxable.
- Form 1099-C. If a lender reduced or canceled at least $600 of a taxpayer’s debt, the taxpayer should receive a “Form 1099-C”, Cancellation of Debt, by Feb. 1. This form shows the amount of canceled debt and other information.
- Form 982. If a taxpayer qualifies, report the excluded debt on “IRS Form 982” Reduction of Tax Attributes Due to Discharge of Indebtedness. They should file the form with their income tax return.
- Igov Tool. Taxpayers should use the “Interactive Tax Assistant” tool – Do I Have Cancellation of Debt Income on My Personal Residence? – on IRS.gov to find out if their canceled mortgage debt is taxable.
- Exclusion Extended. The law that authorized the exclusion of cancelled debt from income was extended through Dec. 31, 2016.
- More Information. For more on this topic see “IRS Publication 4681”, Canceled Debts, Foreclosures, Repossessions and Abandonments.
IRS TAX PROBLEMS – Basic Things to Know About the Child Tax Credit
The Child Tax Credit is a tax credit that may save taxpayers up to $1,000 for each eligible qualifying child. Taxpayers should make sure they qualify before they claim it. Here are five facts from the IRS on the Child Tax Credit:
- Qualifications. For the Child Tax Credit, a qualifying child must pass several tests:
- Age. The child must have been under age 17 on Dec. 31, 2016.
- Relationship. The child must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half-brother or half-sister. The child may be a descendant of any of these individuals. A qualifying child could also include grandchildren, nieces or nephews. Taxpayers would always treat an adopted child as their own child. An adopted child includes a child lawfully placed with them for legal adoption.
- Support. The child must have not provided more than half of their own support for the year.
- Dependent. The child must be a dependent that a taxpayer claims on their federal tax return.
- Joint return. The child cannot file a joint return for the year, unless the only reason they are filing is to claim a refund.
- Citizenship. The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
- Residence. In most cases, the child must have lived with the taxpayer for more than half of 2016.
The “IRS Interactive Tax Assistant” tool – “Is My Child a qualifying Child for the Child Tax Credit” – helps taxpayers determine if a child is a qualifying child for the Child Tax Credit.
- Limitations. The Child Tax Credit is subject to income limitations. The limits may reduce or eliminate a taxpayer’s credit depending on their filing status and income.
- Additional Child Tax Credit. If a taxpayer qualifies and gets less than the full Child Tax Credit, they could receive a refund, even if they owe no tax, with the “Additional Child Tax Credit” (ACTC).
Because of a new tax-law change, the IRS cannot issue refunds before Feb. 15 for tax returns that claim the “Earned Income Tax Credit” (EITC) or the ACTC. This applies to the entire refund, even the portion not associated with these credits. The IRS will begin to release EITC/ACTC refunds starting Feb. 15. However, the IRS expects these refunds to be available in bank accounts or debit cards at the earliest, during the week of Feb. 27. This will happen as long as there are no processing issues with the tax return and the taxpayer chose direct deposit.
- Schedule 8812. If a taxpayer qualifies to claim the Child Tax Credit, they need to check to see if they must complete and attach Schedule 8812, “Child Tax Credit”, with their tax return. Taxpayers can visit IRS.gov to view, download or print IRS tax forms anytime.
- IRS E-file. The easiest way to claim the Child Tax Credit is with IRS E-file. This system is safe, accurate and easy to use. Taxpayers can also use “IRS Free File” to prepare and e-file their taxes for free. Go to “IRS.gov/filing” to learn more.
IRS TAX PROBLEMS – Early Withdrawals from Retirement Plan
Many people find it necessary to take out money early from their IRA or retirement plan. Doing so, however, can trigger an additional tax on top of income tax taxpayers may have to pay. Here are a few key points to know about taking an early distribution:
- Early Withdrawals. An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59½ years old.
- Additional Tax. If a taxpayer took an early withdrawal from a plan last year, they must report it to the IRS. They may have to pay income tax on the amount taken out. If it was an early withdrawal, they may have to pay an additional Ten percent (10%) tax.
- Nontaxable Withdrawals. The additional Ten percent (10%) tax does not apply to nontaxable withdrawals. These include withdrawals of contributions that taxpayers paid tax on before they put them into the plan.
A “Rollover” is a form of nontaxable withdrawal. A rollover occurs when people take cash or other assets from one plan and put the money in another plan. They normally have 60 days to complete a rollover to make it tax-free.
- Check Exceptions. There are many exceptions to the additional Ten percent (10%) tax. Some of the rules for retirement plans are different from the rules for IRAs.
- File Form 5329. If someone took an early withdrawal last year, they may have to file “IRS Form 5329”, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts”, with their federal tax return. IRS Form 5329 has more details.
IRS TAX PROBLEMS – Are Social Security Benefits Taxable?
If taxpayers receive Social Security benefits, they may have to pay federal income tax on part of those benefits.
- Form SSA-1099. If taxpayers received Social Security benefits in 2016, they should receive a Form SSA-1099, “Social Security Benefit Statement”, showing the amount of their benefits.
- Only Social Security. If Social Security was a taxpayer’s only income in 2016, their benefits may not be taxable. They also may not need to file a federal income tax return. If they get income from other sources, they may have to pay taxes on some of their benefits.
- Free File. Taxpayers may use “IRS Free File” to prepare and e-file their tax returns for free. If they earned $64,000 or less, they can use brand-name software. The software does the math for them, which helps avoid mistakes. If taxpayers earned more, they can use Free File Fillable Forms. This option uses electronic versions of IRS paper forms. It’s best for people who are used to doing their own taxes. Free File is available only by going to “IRS.gov/freefile”.
- Interactive Tax Tools. Taxpayers can get answers to their tax questions with this helpful tool, “Are My Social Security or Railroad Retirement Tier I Benefits Taxable”, to see if any of their benefits are taxable. They can also visit “IRS.gov” and use the “Interactive Tax Assistant” tool.
- Tax Formula. Here’s a quick way to find out if a taxpayer must pay taxes on their Social Security benefits: Add one-half of the Social Security income to all other income, including tax-exempt interest. Then compare that amount to the base amount for their filing status. If the total is more than the base amount, some of their benefits may be taxable.
- Base Amounts. The three (3) base amounts are:
- $25,000 – if taxpayers are single, head of household, qualifying widow or widower with a dependent child or married filing separately and lived apart from their spouse for all of 2016
- $32,000 – if they are married filing jointly
- $0 – if they are married filing separately and lived with their spouse at any time during the year